April 14 (Bloomberg) -- PSA Peugeot Citroen, Europe’s second-largest carmaker, will cut its lineup by almost half and turn the Citroen unit’s DS badge into a separate premium brand in a bid to return the automotive division to profitability.
Operating profit from carmaking will amount to 2 percent of sales by 2018, with the figure rising to 5 percent in the 2019-2023 period, Chief Executive Officer Carlos Tavares said today in his strategic review of the Paris-based company.
Tavares, 55, became head of Peugeot at the end of March to guide a reorganization after cumulative net losses exceeded 7.5 billion euros ($10.4 billion) in the past 2 1/2 years. The strategy hinges on reducing the number of models to 26 vehicles by 2022 from 45 now, as well as a push into markets outside Europe. The DS nameplate, revived five years ago as a higher-priced small-car range, will get its own separate management team amid an “aggressive” push into China.
“What we’re going to stop is a mindset where in order to cover fixed costs, we’re going to sell cars at a loss,” Tavares said on a conference call with analysts. “The profit culture is something that we need to put ahead of everything else.”
Peugeot fell as much as 4.8 percent and was trading down 2.4 percent at 13.37 euros as of 10:54 a.m. in Paris. The stock has risen 42 percent this year, valuing the carmaker at 4.74 billion euros.
The reorganization plan “seems to be the minimum requirement, but it’s a start,” Erich Hauser, a London-based automotive analyst at International Strategy & Investment Group, said by phone. “When you run a big ship like this, you can’t expect to turn it around in a few years.”
The project will be funded in part by bringing in Chinese partner Dongfeng Motor Corp. and the French state as investors alongside the founding Peugeot family.
Dongfeng and France will each contribute about half the money for a 3 billion-euro capital increase planned by Peugeot in exchange for 14 percent stakes apiece, according to an agreement reached in February. The family’s ownership will drop to 14 percent from the current 25.5 percent, ending their control of the 118-year-old carmaker.
Tavares joined Peugeot in January from French rival Renault SA, where he was chief operating officer, to succeed Philippe Varin as CEO. The business plan puts Tavares’s stamp on the carmaker’s revival after Varin, 61, arranged to bring in the outside investors and started developing up-market models for the Peugeot brand, in addition to bringing out the DS cars.
“The group will continue to reposition the three brands, while clarifying their lineups,” Peugeot said. Scaling back the range of models will allow the company to “improve market coverage and improve margins by targeting the most profitable segments.”
The DS models take their name from an iconic lineup produced from 1955 to 1975, and the revived versions were designed to compete with vehicles such as Bayerische Motoren Werke AG’s Mini small cars and Audi AG’s A3 compacts. DS will produce six vehicles by 2022 compared with five this year.
“It’s not going to be a big-bang story,” Tavares said. “It’s going to be: do the right cars. Once the right cars are highly appealing, show them to the appropriate investors. A premium brand is a matter of decades; it’s not a matter of years.”
Peugeot was among the carmakers hardest hit as industrywide European auto sales contracted over six years a two-decade low, with the company’s market share narrowing to 10.9 percent in 2013 from 12.8 percent in 2007.
Varin responded by starting a cutback of 11,200 jobs in France, or 17 percent of its workforce in the country, shutting a plant near Paris last year and bringing out new models, such as the 2008 compact sport-utility vehicle, to revive demand. Peugeot’s cash consumption in 2012 amounted to 3 billion euros. The company slashed the figure last year by 86 percent to 426 million euros, beating a target of cutting cash burn by half.
Varin set a target about four years ago for Peugeot to generate 50 percent of its deliveries outside Europe by 2015. The proportion of Peugeot’s non-European sales increased last year to 42 percent, with China accounting for 20 percent of the total, from 38 percent in 2012. That compares to about 68 percent of deliveries at Volkswagen AG, Europe’s biggest carmaker, coming from outside the region.
Peugeot said today that it’s reorganizing sales operations along geographical lines and reiterated a target to triple Chinese deliveries in partnership with Dongfeng by 2020, along with restoring profit in Russian and Latin American businesses.
“The problem we have today is that we are making good money in China but everywhere else, we need a turnaround,” Tavares said. “Why should I be losing money in Russia or Latin America?” With competitors earning profit in those markets, “if we do things properly -- I call it back to basics in our company -- we should make money” as well.
Spending on research and development will average 7 percent to 8 percent of revenue in the next three years, the CEO said. Peugeot is targeting 2 billion euros in operating free cash flow in 2016 through 2018, the company said.
“What’s really interesting is that Tavares is clearly taking a leaf out of Renault’s Drive the Change plan,” International Strategy’s Hauser said. “It’s very similar: in the very near term, it’s about fixing cash and in the longer run, it’s about returning to profitability.”
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